Goldman Sachs (GS) would like to pay back the TARP is early as next month, though to do so it needs to raise fresh outside capital. While credit is still hard to come buy, there’s a good chance that Goldman could pull it off if the wheels don’t come off the wagon again.
The hurdle may not be the credit markets, but rather Warren Buffett — specifically Berkshire Hathaway’s (BRK) investment Goldman. Breakingviews explains
Berkshire Hathaway, led by Mr. Buffett, injected $5 billion into Goldman last September in return for preferred shares. That, combined with a common stock offering, helped bolster Goldman’s capital in the wake of the Lehman Brothers bankruptcy. But Mr. Buffett’s involvement came with a condition that could qualify him for some kind of compensation.
That sounds ominously similar to the so-called ratchets granted to the big pension funds and sovereign wealth funds that invested in Merrill Lynch and Washington Mutual during the credit crisis. A ratchet is a feature that allows those investors’ stakes to be recalculated should the company raise more capital at a lower price.
How big of a problem is this? Probably not very
The deal Goldman struck with the Oracle of Omaha is nowhere near as onerous. Unlike others, Goldman’s miniratchet isn’t linked to the price Berkshire negotiated for its preferred stock and warrants. Instead, it requires two triggers. First, Goldman would have to sell new shares at a discount of 5 per cent or more to the stock price at the time. That’s certainly possible — it offered an 8 per cent discount last September when it sold its stock during one of the most volatile weeks of the year. The average secondary share sale dangled at a little less than a 5 per cent discount in 2008 and just breached that so far this year, according to the research firm Dealogic.
Second, the discount only applies if Goldman sells stock to a small group of select investors. A broader sale — like a rights offering to its shareholders — wouldn’t set off the ratchet.
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